2013 (5) TMI 458 - HC - Income Tax

Forward contract cancellation loss - whether be treated as business loss - Held that - As decided in CIT v. Badridas Gauridu (P) Ltd. 2003 (1) TMI 61 - BOMBAY High Court & CIT v. Soorajmull Nagarmull 1980 (9) TMI 69 - CALCUTTA High Court the expenditure would not be covered under section 43(5) of the Act as speculative transaction. Assessee was not a dealer in foreign exchange therefore, foreign exchange contracts were booked only as incidental to the assessee s regular course of business. Under section 43(5) speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as state above, the assessee was not a dealer in foreign exchange. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export in some cases failed. Thus the assessee was entitled to claim deduction as a business loss. In favour of assessee.

Summary

Issues:
1. Disallowance of loss on account of Foreign Exchange Difference - Speculative or Revenue Expenditure?

Analysis:
The case involved an appeal by the Revenue against the Tribunal's decision to delete the disallowance of Rs.15,04,910 made on account of Foreign Exchange Difference. The assessee, an exporter, had entered into forward contracts with bankers to hedge against losses due to foreign currency fluctuations. The Assessing Officer disallowed the loss as speculative under section 43(5) of the Act. The CIT(A) upheld this decision, relying on previous judgments. However, the Tribunal reversed the order, citing a Bombay High Court decision. The Revenue contended that the transaction was speculative as there was no direct connection between the export contract and dollar booking. On the other hand, the assessee argued that the expenses were revenue expenditure in the course of business, supported by RBI guidelines mandating export contracts for forward contracts. The High Court noted that the issue was covered by previous judgments, emphasizing that the assessee was not a dealer in foreign exchange and the expenses were incidental to the regular course of business.

The Bombay High Court's decision in a similar case involving an exporter of cotton supported the assessee's position, stating that the expenditure was not speculative but a business loss. Similarly, the Calcutta High Court ruled in favor of an importer-exporter of jute, allowing the expenses as revenue expenditure incidental to the business. The High Court agreed with these precedents, highlighting that the transactions were not speculative but part of the regular business operations. The CIT(A)'s observations regarding the lack of direct correlation between exchange documents and export contracts were considered in light of the multiple contracts entered into by the assessee. The judgments cited by the Revenue were distinguished as not directly relevant to the present case, with the Bombay and Calcutta High Court decisions providing the appropriate legal framework.

In conclusion, the High Court dismissed the tax appeal, affirming the Tribunal's decision to delete the disallowance of the Foreign Exchange Difference loss. The judgment emphasized that the expenses incurred by the assessee were not speculative but constituted revenue expenditure in the course of business, aligning with previous decisions by the Bombay and Calcutta High Courts regarding similar cases of forward contracts for hedging against foreign exchange fluctuations in export-import businesses.